Still have not listened to the earnings call yet but will get to it. Had to go pick up the 34lb. turkey for tomorrow. Anyway, had this great idea emailed to me today from JB..
“What would happen if Pershing Square guaranteed all of Borders (BGP) debt (maybe for a small fee). The stock would skyrocket wouldn’t it? The reason the stock has been hammered in addition to the slowing consumer/macro environment is b/c of the heavy debt load. Eliminating a major concern should get the equity moving significantly. Keep in mind that all of BGP’s debt is a credit facility with no restrictive covenants until they are 90% borrowed…Considering they have $518mm of an available $1,125mm outstanding it seems awfully flexible in this environment.
Why would Pershing square do this? Well I doubt that they believe that BGP will default on this debt and they would benefit from both a small fee on the guarantee as well as a significant appreciation in their equity holdings. It’s not as if BGP management will stop managing the business prudently and they likely will continue to pull as much costs out of the business as possible and pay down debt on a continuing basis.”
I can’t poke a hole in this…anyone have any comments?
Disclosure (“none” means no position):Long BGP
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3 replies on “Borders and Pershing…..A Very Interesting Idea”
The reaction was skewed, but in general I think it will turn out for the good. If you look, you can already see things lightening up! Most people don’t realize how much money there is out there. During economic times like this, there is more money to be had than ever. Because of the bailouts and economy, lenders are bending over backwards to bail you out too. Believe it or not, there is people getting tons of cheap money nowdays to start businesses, buy homes, pay off debt, and more. Bailouts for Everyone
Would Ackman be willing to shift a $500M contingent liability onto Pershing’s balance sheet? I’d think he would be wary of putting his investors in that type of position. While the equity might run up in the short term, and I don’t think Borders is going to default either, Ackman has to consider his fiduciary duties.
If I remember correctly Ackman runs on the order of $6B (4?). So a new $500M contigent liability is material. The problem is, his equity commitment is so low compared to that potential liability that he (and his investors) would have to truly consider whether it’s worth the risk.
Pershing holds about 10.5 million shares, some more through warrants, and the $65M Paperchase contingent put as well. Would he throw a $500M liability on top of that to protect such a small position? Maybe, but it’s something to think about.
There’s only one small problem with this idea: Borders has shot its wad and has no viable strategy for growth. Their new website is a dog–it’s not close to breaking even. Sales are horrible–thy would have to borrow a lot ore money to get their inventory and staff back to where it should be. They cannot compete with Barnes and Noble even if they were debt free. Look, you could buy a controlling interest in the company for $30 million! If you think it’s so great–do it.